In-fighting among regulators trips up ‘simple’ Volcker rule

Paul Volcker, the former Federal Reserve chairman, is surprised a ruled named after him to prevent “too-big-to-fail” banks has taken more than three years to craft. “It’s ridiculous,” he told the Wall Street Journal, a sister publication of MarketWatch. See: A simple bank rule proves difficult to write.

Bloomberg

Paul Volcker is shocked, shocked at Washington.

It’s surprising that Volcker is surprised. Regulators in Washington often take a long time to craft rules, even those based on a simple principle. It’s especially true regarding regulation of Wall Street, which rarely fails to put up a stiff political fight.

The so-called Volker rule is as simple as it gets – on paper. Banks that depend on government help in times of crisis should no longer be allowed to bet their own money on investments. The rule is meant to help prevent a rerun of 2008, when banks took on too much risk, suffered big losses and threatened to crash the entire financial system.

Yet regulators have struggled for more than three years to write a rule acceptable to the handful of agencies that monitor U.S. banks, according to the Journal article. Too tight, and the rule will hurt the ability of banks to best serve their customers. Too loose, and banks could find ways to get around the restrictions using complex trading mechanisms.

Regulators aim to complete the rule by the end of 2013, so it can take effect in July 2014. The rule has metastasized from Volcker’s one-and-a-half page outline into a document that could end up more than 900 pages long by the time it’s finished.